HMRC have released a list of the 10 worst excuses for missing the 31 January tax return deadline, however there are a number of cases where HMRC’s limited definition for what constitutes a reasonable excuse has been exposed.
The list of excuses published by HMRC is as follows:
- My pet dog ate my tax return…and all the reminders.
- I was up a mountain in Wales, and couldn’t find a postbox or get an internet signal.
- I fell in with the wrong crowd.
- I’ve been travelling the world, trying to escape from a foreign intelligence agency.
- Barack Obama is in charge of my finances.
- I’ve been busy looking after a flock of escaped parrots and some fox cubs.
- A work colleague borrowed my tax return, to photocopy it, and didn’t give it back.
- I live in a camper van in a supermarket car park.
- My girlfriend’s pregnant.
- I was in Australia.
Whilst these excuses are clearly unreasonable, recent cases have shown that HMRC continue to pursue their internal line that only ‘death, disease or disaster’ would constitute a reasonable excuse. However, the legislation itself simply states that the excuse must be reasonable. Recent cases have included excuses such as inability to pay (T James V HMRC), HMRC communication failure (M Styles v HMRC), HMRC system failures (Eclipse Generic Ltd v HMRC) and in the case of Spink v HMRC (2014), it was found that it was reasonable for a taxpayer to assume that tax was not payable until the actual tax status had been established.
Each case should be determined on its own facts and we believe HMRC are continuing to refuse reasonable excuse claims in circumstances that are “reasonable” under case law.
A recent case on ‘property trading’ has been won by taxpayers, but longer term, HMRC may be secretly cheering their own defeat because of the possible arguments it may give them on other future cases.
The case of Albermarle 4 relates to the classic dilemma of property dealing. Is it a trading transaction, taxable as income? Or is it a deal on capital/investment account to be dealt with under the capital gains tax regime? In many cases the facts point clearly one way or the other, but often, particularly where people have interests in a number of properties it can be unclear whether they are buying to hold, or buying to sell – especially as, for the right offer, virtually all commercial assets are for sale anyway.
The judgement in Albermarle 4 suggests that the decision was very finely balanced, with the taxpayer just about convincing the First Tier Tribunal that they intended to sell the properties on and trade them, rather than hold them long term. This meant that the resulting losses could be set against other income, producing a significant tax saving. This was despite the fact that the properties were shown as fixed assets on the balance sheet, rather than trading stock for resale which would have been a more conventional accounting treatment.
HMRC also lost on a subsidiary technical point on their powers which held that making an amendment to a partnership return to cancel a loss (which they purported to do) was not the same as making a ‘discovery assessment’ so they were ‘out of time’ in any event in terms of adjusting the earliest year of the enquiry into the taxpayers losses. Again this shows the importance of understanding properly which powers HMRC are purporting to use when they seek to make adjustments to a taxpayers self assessment. The rules are complex but do not give HMRC carte blanche to make amendments, especially outside the normal enquiry window. This is likely to be an important taxpayer defence in future, where stretched HMRC resources attempt to widen enquiries into more than 1 year. So far the courts seem to be willing to try to strike a balance between allowing HMRC powers to investigate whilst also protecting taxpayers by giving them the certainty regarding earlier years they were promised when self assessment was first introduced.
The First-Tier Tribunal has recently heard the case J Flanagan v HMRC (TC02161).
An employee of RBS plc took out a mortgage with his employer. The terms of the mortgage were better than those available to normal RBS customers.
HMRC assessed Mr Flanagan with tax on a benefit in kind through the provision of a “Cheap Loan” by his employer (ITEPA s175), because the rate of interest was lower than the official rate determined by HMRC.
Mr Flanagan appealed on the basis that there were mortgages available in the open market with a lower interest rate than the official rate.
In upholding HMRC’s assessment the Judge had sympathy for the appellant but stated that under the rules tax was technically and correctly due.
Bank employees beware!
Under the new penalty regime, which covers the majority of taxes, there are minimum and maximum penalty levels prescribed under the legislation based upon the behaviour and quality of disclosure made by a taxpayer.
However many are unaware that HMRC have the discretion to reduce a penalty below the minimum percentage if the failure (resulting in a penalty) arises as a result of ‘special circumstances’.
HMRC guidance states that this means the circumstances have to be “exceptional”. However a recent tax tribunal found that if this definition was used the results would be too restrictive. The judge said that special circumstances were more akin to “something out of the ordinary, something unknown” and therefore they did not necessarily have to be exceptional.
The effect of this was that HMRC had not correctly considered whether “special circumstances” applied. Upon considering the facts the tribunal found that ‘special circumstances’ did in fact apply and therefore the original penalty was reduced by 60%.
It will be interesting to see whether HMRC use their power of discretion to reduce a penalty more widely in light of this case.